Risk Assessment

Growth supported by investment (33% of GDP)

Uzbekistan is expected to remain one of the most dynamic economies in the CIS in 2019, although official growth figures appear to be overestimated. Public investment, aimed at improving industrial facilities and infrastructure, especially in the gas, hydroelectric, road and housing sectors, should continue to support activity, particularly in construction. The state could get support from multilateral donors and foreign private investors who were encouraged by the measures taken in September 2017 to open up the economy, which included liberalising the exchange rate and halving customs duties. Manufacturing (machinery, automotive equipment, food processing) and services are also expected to remain buoyant. Exports, which make up nearly 20% of GDP, are expected to slow as the price of gold (the main export product) stabilises and gas, copper, and cotton exports increase weakly. External demand could be affected by trade disputes between China and the United States. As imports of capital goods and metals for infrastructure and industrial facilities are expected to continue to grow briskly, trade could ultimately make a slightly negative contribution. Household consumption, which accounts for more than 50% of GDP, may also be less buoyant as the ongoing recovery in remittances from the approximate two million expatriates in Russia and Kazakhstan is offset by the adverse impact of higher prices on real incomes. Inflation is poised to remain high, fuelled by periodic price increases for utilities (water, gas, electricity) to bring them into line with market prices, as well as by the rise in food prices fuelled by shortcomings in trading and distribution systems. However, inflation should decline at the end of the year as the effects of the September 2017 50% devaluation of the the so’m wear off.

Economic reform accompanied by small deficits

The authorities have embarked on a vast reform of the public finances, the cost of which is estimated as 2.5% of GDP for 2019. Just 8,000 of the country's 350,000 companies paid taxes in 2017. Generally, they manage this because of their monopoly position and preferred access to credit. Among those that do contribute, state-owned companies pay half the tax. There are 1,800 such firms. They employ 800,000 people, or 18% of the working population, and are charged prices that are not in line with their costs, in return for the benefits they enjoy elsewhere. The depreciation of the currency weakened many of these companies, as they carried debt in foreign currencies. To avoid a fall in revenues, the Uzbek authorities want to broaden the tax base, while lowering the tax rate to reduce the informal economy. Public debt is low, and Uzbekistan’s sovereign wealth fund (SWF) holds reserves equivalent to 40% of GDP, so there is room for manoeuvre.

The underdeveloped banking system is closely controlled by the state, particularly regarding its lending policy, with 60% of loans linked to state-owned companies. The three largest banks, which are all state-owned, account for half of all assets. With the exchange rate liberalised and the central bank doing a better job of steering inflation, agents should be encouraged to gradually convert their assets in foreign currencies, which can no longer be used as a domestic means of payment, thus contributing to the de-dollarisation of the economy.

Trade liberalisation is being accompanied by a widening goods and services deficit. Remittances from expatriates are no longer sufficient to compensate for this, resulting in a small current account deficit, which is easily financed by concessional loans from foreign donors and FDI. External debt is low, and reserves are equivalent to more than 20 months of imports, although half of these reserves are held by the SWF.

A strong regime that is nevertheless keen to attract foreign investors

Following the death of Islam Karimov, who had been President since the country's independence in 1991, his Prime Minister, Shavkat Mirziyoyev, took over as head of state after winning a comfortable election (89% of the vote) in December 2016. Like his predecessor, he is expected to maintain a strong state. Even so, he is ending a decade of isolationism by forging closer ties to neighbouring countries, including Kyrgyzstan and Tajikistan, and signing and/or negotiating agreements on water management, transport links, the electricity grid, and border disputes. Similarly, there has been a rapprochement with Russia, although this is not expected to interfere with the country’s closer relations with the West and China. Uzbekistan’s strategic plan for 2017-2021 includes reforming the administration, establishing the rule of law, liberalising and opening up the economy, and developing education, health; and infrastructure. The idea is to build investor confidence and reduce unemployment and poverty. Restrictions on freedoms, however, will act as a breeding ground for unrest among the country’s youthful population, which the government will do everything in its power to control. The next electoral deadline will be parliamentary elections at the end of 2019 or early 2020, which are expected to be won by parties close to the government.